WILL MEDICAL MARIJUANA BE SUBJECT TO FLORIDA SALES TAX?

The groups battling to legalize pot sales in the U.S. had a rather large victory in the 2016 election. Presuming the election results hold, we will have 29 states that permit cannabis use for either recreational or medical purchase and use, now including – FLORIDA. Whatever your position is on the topic, many voters are warming up to the idea that pot use should not be considered a crime and that law enforcement would be better spent fighting more serious crimes. Believe it or not – there is yet another battle to wage over marijuana in Florida and yet one more government agency that will be waging that battle. That battle will be fought over whether Florida will subject sales of medical marijuana to sales tax. Seriously – I am not kidding. In fact, the drafters of the constitutional amendment anticipated that cannabis may be subject to sales tax when they discussed the financial impact to the state as follows:

Increased costs from this amendment to state and local governments cannot be determined. There will be additional regulatory costs and enforcement activities associated with the production, sale, use and possession of medical marijuana. Fees may offset some of the regulatory costs. Sales tax will likely apply to most purchases, resulting in a substantial increase in state and local government revenues that cannot be determined precisely. The impact on property tax revenues cannot be determined.

I know some of you are asking, “aren’t prescription drugs exempted from sales tax in Florida?” The answer to your question would be YES. Under section 212.08(2)(a), Florida Statutes (F.S.), medicine dispensed according to an individual prescription is exempt from Florida sales tax. However, there is a false presumption in the question. Because marijuana is still illegal under federal law, doctors are not allowed to prescribe medical marijuana. To overcome this hurtle, doctors are required to issue a “physician certificate” instead of a prescription. This seems like a minor technicality, but sales tax exemptions are strictly construed with any ambiguity ruled in favor of the government. So without a prescription, the exemption doesn’t apply.

That being said, section 212.08(2)(a), F.S., goes on to provide that “common household remedies” are also exempt from sales tax, which are described as follows:

common household remedies recommended and generally sold for internal or external use in the cure, mitigation, treatment, or prevention of illness or disease in human beings, but not including cosmetics or toilet articles, notwithstanding the presence of medicinal ingredients therein

It is not a stretch of the imagination by any means to say that the “medical use” of marijuana “for the treatment of a debilitating medical condition” is considered a home remedy. However, home remedies are only exempted if they are provided in a generic list of home remedies prescribed and approved by the Department of Business and Professional Regulations (DBPR), which is provided to the Department of Revenue periodically. Unfortunately, the DBPR has not added marijuana to the list of home remedies. [current list of home remedies is downloadable at the end of this article]

During a liaison meeting between the Department of Revenue and the Florida Institute of Certified Public Accountants, this author witnessed several key members of the Florida Department of Revenue specifically say, in the middle of the meeting, that they believe medical marijuana will be subject to sales tax because it will not be issued by prescription and it is not a DBPR approved home remedy. Combine the DOR’s position on the subject with the financial impact statement’s implication that marijuana is anticipated to be taxed, one could easily argue that the medical sale of medical marijuana is not exempt from sales tax. However, falling for this logic may be like believing in the presidential polls at 8:00 AM on November 8, 2016.

As with most things related to sales tax, determining whether something is exempt requires a detailed reading of all the relevant laws. Let’s start out by reviewing the newly approved Florida Constitutional Amendment for medical marijuana, which provides in relevant part:

Article X, Sec. 29, Subsection (a)(1) authorizes “[t]he medical use of marijuana by a qualifying patient…”

Article X, Sec. 29, Subsection (a)(2) provides “A physician shall not be subject to criminal or civil liability or sanctions under Florida law solely for issuing a physician certification with reasonable care to a person diagnosed with a debilitating medical condition in compliance with this section.

Article X, Sec. 29, Subsection (b)(6) defines “Medical Use” means the acquisition, possession, use, delivery, transfer, or administration of an amount of marijuana not in conflict with Department rules, or of related supplies by a qualifying patient or caregiver for use by the caregiver’s designated qualifying patient for the treatment of a debilitating medical condition.”

Article X, Sec. 29, Subsection (b)(9) defines “Physician certification” is defined as “a written document signed by a physician, stating that in the physician's professional opinion, the patient suffers from a debilitating medical condition, that the medical use of marijuana would likely outweigh the potential health risks for the patient, and for how long the physician recommends the medical use of marijuana for the patient.”

Below are some of the most relevant Florida statutes with sections highlighted for emphasis:

Sec. 212.08(2)(a), F.S., provides “There shall be exempt from the tax imposed by this chapter any medical products and supplies or medicine dispensed according to an individual prescription or prescriptions written by a prescriber authorized by law to prescribe medicinal drugs … ;

Sec. 212.08(2)(b)(4), F.S. defines: “Prescription” includes any order for drugs or medicinal supplies written or transmitted by any means of communication by a duly licensed practitioner authorized by the laws of the state to prescribe such drugs or medicinal supplies and intended to be dispensed by a pharmacist.”

Sec. 212.08(2)(a), F.S., also provides chemical compounds [ ] used for the diagnosis or treatment of human disease, illness, or injury”

Reviewing these sections of law and the newly approved constitutional amendment, one may begin to a see a potential argument or two to exempt marijuana from Florida sales tax.

Argument 1 – Physician Certification is a Prescription

As we mentioned previously, sec. 212.08(2)(a), F.S., provides that prescription drugs are exempt from sales tax. Sec. 212.08(2)(b)(4) broadly defines a “prescription” as any order for drugs written or transmitted by any means by physician. The new constitutional amendment requires medical marijuana to be approved by a “physician certification” that can only be issued by a licensed doctor, who just happens to also be able to issue prescriptions. One could read the definition of “prescription” in sec. 212.08(2)(b)(4), F.S., to include “physician certification” because the physician certification is an order for drugs written by a licensed physician. There is only one problem with this argument. Sec. 212.08(2)(b)(4), F.S., includes with the definition of “prescription” the apparent condition that the drug be intended to be issued by a pharmacist. Under the new amendment, “Medical Marijuana Treatment Centers” are the only entities allowed to acquire, cultivate, possess, process, transfer, transport, sell, distribute, dispense, or administer marijuana. Unfortunately, thus far, I have not found a way to have “Medical Marijuana Treatment Center” (MMTC) to be considered a pharmacy. So if a “prescription” only relates to drugs issued by a pharmacy, then this situation might have Bill and Ted[i] pretty bummed out.

Argument 2 – Marijuana is a Chemical Compound Used for

Treatment of Human Disease or Illness

Sec. 212.08(2)(a), F.S., provides an exemption for chemical compound used to treat human disease or illness. The medical marijuana amendment very specifically provides that cannabis may only be used to treat a “debilitating medical condition” defined as:

cancer, epilepsy, glaucoma, positive status for human immunodeficiency virus (HIV), acquired immune deficiency syndrome (AIDS), post􀀁traumatic stress disorder (PTSD), amyotrophic lateral sclerosis (ALS), Crohn's disease, Parkinson's disease, multiple sclerosis, or other debilitating medical conditions of the same kind or class as or comparable to those enumerated, and for which a physician believes that the medical use of marijuana would likely outweigh the potential health risks for a patient.

So if medical marijuana could be considered a chemical compound, then the exemption provided in sec. 212.08(2)(a), F.S., would apply. I predict the FL DOR will object to any assertion that the typical marijuana bud would be a “chemical compound.” And since exemptions are strictly construed against the taxpayer, the FL DOR would likely win this argument. However, all hope is not lost. The amendment specifically provides that the marijuana may be processed and sold in products such as oils, aerosols, and ointments – all of which could reasonably be considered chemical compounds. So at least this items would likely be exempt from sales tax.[ii]

Argument 3 - The Brownie Exemption

Food products for human consumption are generally exempt from sales tax whether processed, cooked, raw, canned, or in any other form that is generally regarded as food. To the extent that medical marijuana is sold in a form that is considered food, such as a brownie, the existing sales tax exemption should theoretically apply. However, I would expect the Department of Revenue to aggressively challenge whether an item sold as a medical product should be considered a food item. So, once again, the MMTCs could be looking at truly gray area of the law and be on the hook for taxes not collected if the argument is lost. This is one item the MMTC's might consider going for a Technical Assistance Advisements on to protect themselves from owing tax that they could have collected from customers.

Argument 4 - Agricultural or Manufacturing Exemptions

While all the prior arguments have been about the taxability of selling medical marijuana, any MMTC should be concerned about the sales tax consequences at every stage of their business from buying the seeds, equipment used to grow the plants, electricity, processing equipment, packaging and shipping materials, etc, etc, etc. The list of items that are potentially subject to sales tax is very long and the effect of these business’s bottom lines could be significant. An MMTC might be able to rely on existing agricultural exemptions to exempt the purchase of seeds and equipment used in the growth stage of production. Purchasing existing plants might be exempt under a sale for resale exemption. The equipment and electricity used to process marijuana into various products could fall under existing manufacturing exemptions. Packaging and shipping materials could fall under existing exemptions as well.

Conclusion

With the exception of products made from medical marijuana that could be considered chemical compounds, it is currently hard to find a way to exempt medical marijuana at least under the verbiage in the constitutional amendment and current sales tax exemption statutes. Given the limitations of use except for treatment of debilitating medical conditions such as ALS or PTSD, one would think our government agencies would find a way to make the newest legal medical product exempt from tax. For example, if the Medical Marijuana Treatment Center was considered a “pharmacy” under the laws that implement the amendment, then medical marijuana would be home free as an exempt product. Alternatively, political pressures could be put on the DBPR to approve medical marijuana as a home remedy, which would have the same legal affect and probably have less federal regulatory implications compared to treating a Medical Marijuana Treatment Center as a pharmacy. On the other hand – our legislature may have been looking to create a new source of sales tax revenue on cannabis as Colorado has done. Only time will tell whether political pressures will allow medical marijuana exempt from sales tax. It could very well boil down to whether the legislature and FL DOR are willing to consider the industry to truly be providing a medial product or whether this is all a big ruse to legally manufacture and sell marijuana for a list of medically perceived alignments that don’t really exist. Either way, I strongly recommend anyone considering getting into this industry to either get a ruling from the Florida Department of Revenue on this issues or to begin lobbying now to create new, clear exemptions for the industry.

About the author: Mr. James Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm Moffa, Sutton, & Donnini, PA. Mr. Sutton’s primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, AAA-CPA, and the Florida Society of Accountants. Mr. Sutton is also co-author of CCH's Sales and Use Tax Treatise. You can contact Mr. Sutton at 813-775-2131 or JamesSutton@FloridaSalesTax.com or his firm bio.

AUTHORITY

MEDICAL MARIJUANA AMENDMENT – ARTICLE X, SECTION 29

Florida Statute 212.08(2) (Medical Exemptions)

Rule 12A-1.097 (medical exemptions)

Florida Form DR-46NT – List of Non-Taxable Medical Items

ADDITIONAL RESOURCES

GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.

CLOSE BUSINESS TO AVOID LARGE FL SALES TAX ASSESSMENTS?, published July 7, 2013, by James Sutton, CPA, Esq.

FL TAX ALERT – 200% PENALTY STINGS BUSINESS OWNER, published March 24, 2013, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.

FT MYERS BUSINESS OWNER ARRESTED FOR FAILING TO REMIT ONLY $8,000 IN SALES TAX COLLECTED, published August 11, 2012, by James Sutton, CPA, Esq.

WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.

FL SALES TAX – RESALE TO OUT OF STATE CAR DEALERS, published September 19, 2014, by James Sutton, CPA, Esq.

SHIPPING CHARGES vs FL SALES TAX, published June 8, 2014, by James Sutton, CPA, Esq.

FL TAX ALERT – ALCOHOL AND TOBACCO RETAILERS BEWARE!, published February 10, 2012, by James Sutton, CPA, Esq.

FL SALES TAX BIOMETRIC FINGERPRINT – VOLUNTARY DISCLOSURE AVAILABLE, published March 6, 2016, by James Sutton, CPA, Esq.

FL SALES TAX CLASS ACTION ON PIZZA HUT DELIVERY FEE, published December 9, 2015, by Jerry Donnini, Esq.

FL DOR ABUSES THE CONVENIENCE STORE INDUSTRY, published October 4, 2015, by James Sutton, CPA, Esq.

INTERIOR DESIGNERS: FL SALES TAX PLANNING, published July 16, 2015, by Amanda Levine, Esq.

FL USE TAX AUDIT LETTER?, published April 28, 2016, by James Sutton, CPA, Esq.

IS RENT SUBJECT TO FLORIDA SALES TAX, published January 26, 2015, by Jerry Donnini, Esq.

FL COUNTER-TOP COMPANIES: FL SALES TAX PROBLEMS, published October 13, 2013, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.

CABINET COMPANIES WITH SALES TAX PROBLEMS, published October 5, 2013, by James Sutton, CPA, Esq.

FL SALES TAX – TAA 14A-020 – NAICS CODES VERSUS NONRESIDENTIAL CLEANING SERVICES, published October 8, 2014, by James Sutton, CPA, Esq.

FL LITIGATION ALERT – CAR WAS TAKES ON FLORIDA DEPARTMENT OF REVENUE, published July 26, 2013, by Jerry Donnini, Esq.

FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.